Memo to Tom Sargent: Economics Is More than Just Common Sense

Paul Krugman was really not very happy with his fellow Nobel Laureate Tom Sargent this week, posting two consecutive rebuttals (here and here) to a 2006 commencement speech (five years before getting the prize) that Sargent gave at UC Berkeley.

Let’s look at what Sargent had to say. All of it.

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

I was mainly struck by two things about this speech:

First, the brevity of the speech is attributed to empathy toward the limited attention span of the audience, but it is hard to avoid the suspicion that Sargent was responding to the incentive to shirk the challenging responsibility of a commencement speaker to say something meaningful and memorable, instead patching together a list of truisms and platitudes interspersed with a few potentially problematic assertions, without distinguishing between the platitudinous and the problematic.

Second, the complacent tone, audible especially in the sentence: “Economics is organized common sense.” At the same time Sargent says that economics is a beautiful subject. It would be interesting to find out what it is about the organization of common sense that seems beautiful to Sargent, but let us not probe too deeply into Sargent’s thought processes. Nearly three years ago, just after starting this blog, I observed that common sense is not enough to do economics right. Things are not always what they seem to be. The earth is not really flat and the sun doesn’t really revolve around the earth. Our common sense has to be taught how to perceive reality, which means that we have to think more carefully about the world than just accepting what common sense tells us must be so.

That’s why reading Sargent, I couldn’t help but think of what John Stuart Mill, who very likely had an IQ even higher than Tom Sargent, said 165 years ago in his great treatise Principles of Political Economy.

Happily, there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete.

So, in the spirit of not just taking things at face value, let me offer some brief comments on Sargent’s 12 maxims.

1 Many things that are desirable are not feasible. Comment: And the feasibility of many of those things that are desirable is uncertain. In fact, mention of uncertainty — a rather important feature of reality, or so it would seem to my common sense — is conspicuous by its absence.

2 Individuals and communities face tradeoffs. Comment: Tradeoffs don’t necessarily exist in situations when individuals or communities are not optimizing. Even though every individual is optimizing, the community may not be.

3 Other individuals have more information about their abilities, their efforts, and their preferences than you do. Nitpicky Comment: Very badly written. Evidently he means that other individuals have more information about themselves than you have about them, but it could be interpreted to mean that they have more information about themselves than you have about yourself, some people being more self-aware than others.

4 Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always working as intended. Comment: None, but see 11 below.

5 There are tradeoffs between equality and efficiency. Comment: This is so vague and so simplistic as to be useless.

6 In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse. Comment: What kind of equilibrium are we talking about? Not every equilibrium is a social optimum. How do we know that equilibrium is an appropriate way of analyzing a social state? In an equilibrium, can there be surprises? Regrets? If we observe people being surprised and being regretful, does that mean they are deluded or misinterpreting their feelings? What is the common sense understanding that one should attach to such frequently observed states of mind?

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation. Comment: None.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made. Comment: None.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore). Comment: The circumstances under which generational shifts occur and the magnitude of those shifts are not so clear. Also, if the growth of knowledge and productivity, which are not necessarily tied to the amount of current saving, is likely to make future generations substantially better off than the current generation, it is not obvious that imposing a debt burden on future generations is an unjust choice.

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation. Comment: Depends on what governments spend on.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves). Comment: Why most? Who does want to pay for public goods and who doesn’t want to receive transfers? I thought that everyone responds to incentives. See 4 above.

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10 Responses to “Memo to Tom Sargent: Economics Is More than Just Common Sense”

David, nice article. I also enjoyed the old one you linked to: “Why The Wall Street Journal Editorial Page is a Disgrace” and your interchange with Morgan Warstler in there. I hadn’t seen that before. Do you detect any change in the WSJ’s editorial page since then for better or worse?

Any argument based on economic equilibrium is basically “This is the best of all possible worlds.” That is, an argument against any change, even for the better. In other words, it’s the old divine right of kings garbage mankind suffered from for millennia.

Tom, Thanks. I can’t really tell whether the Journal has gotten better or worse. I think the problem is that they have low standards for what they publish as long as it fits in with their political agenda. I find that offensive. If I had a policy agenda, I would want to nurture it with the best arguments I could think of or get others to think of, but that doesn’t seem to be their approach.

I also found the Sargent bromides cloying. And should we eliminate welfare for veterans? How about my right to pollute your land, air and water? How about “Most people want someone else to pay for national defense, but cut their own taxes.” Or, “U.S. agriculture is heavily subsidized, protected, and regulated. Yet it leads the world. It defies all my rules.”

Don, Thanks for your link. I agree with your take. Actually I had something vaguely similar in mind when making my own comment.

Benjamin, Yes, good point. There’s just something anti-intellectual about presenting twelve rules to graduates of an elite university as if the rules as stated provide all or nearly all the tools necessary for making the graduates to make their way in the world.

I just read your comment on those 12 maxims. But well to be honest, I don’t think they are wrong at all. Essentially they are just the principals of the subject ‘Economics’ instead of what the reality is actually ‘following’. What you are pointing out is only the flaws that ‘economics’ are making too much assumption.

Chan, I didn’t say that they were wrong, just that they don’t provide a very clear guide by which to make decisions. A commencement speaker ought to provide more to his audience than a mere recitation of basic assumptions that are not always relevant to the real world.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.